Global Watch

The Trump movement won't end with Trump

After Marine Le Pen's defeat in the French presidential elections, many commentators have suggested that the rise of populism is stalling.

Le Pen, and Geert Wilders before her in the Netherlands, failed to excite the same level of support as Donald Trump was able to do in the US last year.

This, they argue, shows that populism won't catch on. The victories of Mark Rutte in the Netherlands and Emmanuel Macron in France were victories for good sense and sound economics, and these will prevail.

However, there is good reason to believe that this assessment may be premature. As Investec economic strategist Chris Becker points out, the current rise of populism has come out of an economic reality that hasn't changed.

This is what he calls the 'upside-down global economic order', characterised by negative or at least very low interest rates across the developed world.

“In the history of interest rates going back 5 000 years, interest rates have never been negative,” says Becker. “Today is the first time.”

Even in the late 1800s at the height of the industrial revolution when consumer inflation was dropping at a rate of 5% to 7% per year, interest rates were still positive between 5% and 10%. When GDP and inflation in the US collapsed by around 20% in the Great Depression in the 1930s, long bond yields never fell below 2.5%.

The radical experiment

The current environment is therefore extraordinary, and it has come about due to coordinated efforts by central banks around the world.

“Interest rates have been declining in the west since 1981, when they peaked in the US at around 18%,” Becker explains. “So we've had radical monetary experimentation from central banks. The question is has it boosted growth?”

He argues that his analysis of economic data from developed markets since the financial crisis of 2008 suggests that there hasn't been a massive economic recovery. Although the unemployment rate has come down in the US, broad unemployment has not come down to the same extent, and many people are still reliant on food stamps.

“The people who have done well are asset owners who have access to credit markets and cheap money,” says Becker. “In other words, the top 1%.”

This has led to a growing discontent as the inequality is obvious and growing. This, Becker believes, is a big driver of the move towards populism and away from established policies.

“We've had this radical money printing, zero interest rate experiment in western countries and it hasn't really worked to help the man in the street,” Becker explains. “That has resulted in a populist backlash. Although they don't know it's because of zero interest rate policy, they do know that something is wrong and they want something to change.”

The Trump movement

This rise in populism has most obviously been represented by the election of Trump in the US.

“If you look at the Trump movement and the message they promoted in order to get into the White House, it was a move away from your typical form of class analysis of employers versus workers,” says Becker. “The class conflict as these people see it, which I think is roughly around half of America's population, is that it's the people versus the government – the people versus the elite. The ideological framework Trump tapped into is tax payers versus tax receivers.”

He adds that if the principles of this movement were to be implemented as government policy, there would be reason to be optimistic about economic growth.

“There is a real opportunity in the US to deregulate, to deconstruct the administrative state, to cut taxes, to reform taxes, and move more power back to state governments,” Becker notes. “If these ideas get implemented by the federal government it will be good for growth.”

A strong America in turn would be very good for the global economy. It would lift commodity prices, keep interest rates down, and lead to a pick up across the world.

But what if...

Currently, however, Trump is struggling to deliver on many of the promises he made. And Becker says it's worth thinking about what would happen if he doesn't succeed and the movement that elected him feels betrayed.

“You could see even bigger political tension playing out,” Becker suggests. “There are political historians in the US who say that someone like Trump will be created even if he's not there.”

As politics is downstream of culture, where there is a cultural shift politics will respond.

“So there could be more political dislocations because the next person may be even more radical than Trump,” says Becker. “That is why it's so difficult to analyse these markets. Politics are going to get volatile, and Trump and Brexit are only just the beginning of it.”